- US Treasuries fail to react to weak GDP report
- European bonds remain in sideways range
- EUR/USD moves to new highs, but??¦
- More of the same?
Global overview: More of the same?
On Friday, the US GDP figure for the first quarter of the year was the key point of reference for markets. In line recent evidence, the figure came out on the weaker side of expectations. This pulled the trigger for the single currency to set the new all time high against the dollar, which the trading community was already looking for over the previous week(s). However, last Friday??™s report apparently wasn??™t that much of a surprise and after a few hours of trading, EUR/USD settled back in the low 1.36- envrionmnet where it already is for some time. Also in other markets, the US GDP report failed to change the trading world in a profound way. Bonds at the end of the day were not that far from the Tuesday closing levels and this even was the case for the US stock markets. Of course, a first estimate for the US GDP still is important, but from a market point of view, the heavy-weights still have to come this week with the ISM and the US payrolls.Today, we already get some less important economic series, but later out this week, the ISM and the payrolls should be able to give a clearer picture on the shape of the economy going forward. The key question still is whether or not the slowdown in the US housing market will leave deeper traces in the broader economy than was the case up until now. We still tend to think that disturbances in the housing markets contain the risk to have more far-reaching consequence (both in depth and in time) and as such we put ourselves on the softer side of the consensus expectations. This might also imply that some Fed help might still be needed later this year and/or in the first half of 2008. However, the investor community and the analysts are still highly divided on what to expect from the US economy going forward. Probably it will be again up to the payrolls to decide whether some domino blocks will drop to one side or another.
Currencies: EUR/USD moves to new highs, but??¦
The news headlines of the weekend newspapers were almost without exception focusing on the new record high for the euro. But few highlighted that the record high was only a minor new high and that it was not kept in place for longer than a few hours??¦Indeed, EUR/USD moved to new highs. The US GDP release brought a new disappointment. It came out at 1.3% Q/Q (consensus stood at 1.8%). The slowing growth pattern is hurting the dollar. Inflation is spooking the market as well though, as the price deflator came out at 4% and the core PCE deflator at 2.2%. This could hold the Fed back for a longer time, so it is unable to help the US economy. EUR/USD reached new highs at the 1.3675 zone.
But these altitudes couldn??™t be maintained by the single currency. As the momentum soon enough evaporated to the upside, with the new record effectively just a few pips above the old one, the market players starting doubting whether this would be a false break. And this proved somewhat of a self-fulfilling prophecy. The pair fell back lower to the 1.3620 zone. There was of course also no reason to immediately push EUR/USD below 1.36 on the back of the US GDP data, so the pair stabilized. For the moment it is still at the 1.3640 zone, well below the previous record high.
That creates some doubts. This is only logical as this is a big step into the unknown above the record highs. That is why something more tangible and forward looking would be needed, such as the US ISM manufacturing tomorrow or even Friday??™s payrolls report, to give some longer term guidance to the FX market. Today, PCE core and Chicago PMI numbers will give some guidance to the market, but as said, just before the ISM, the market will likely be in a wait-and-see mode.
USD/JPY hit day lows right after the US GDP numbers last Friday, but this dip was used for installing fresh yen shorts and the pair soon enough leapt higher above the pre-GDP-release levels at 119.30. Day highs were seen at the 119.80 zone.
The yen is just asking for it: even against a weakened dollar, the Japanese currency has no option it seems than to weaken. A re-test above 120 is just a question of timing. The carry traders have absolutely no inclination to stop their profitable deals. This seems like a one-way bet.
The lack of momentum is sourced back to Japan itself (see CPI data, lower eco data, BoJ inaction, etc.) and as long as that doesn??™t change, it is difficult to see sustained downward action in yen pairs. Moments of fast counter reaction to the down-side such as noted in late February/ early March, that remains of course possible, but that move is gradually being erased!
At the time, it was caused by an unwinding of carry trades. Some players are pleading for that now as this weekend China has upped reserve rates by 50 bp, in an effort to cool down the Chinese economy somewhat. However this move had been widely expected, and was even seen a minimum, so nobody is surprised; the downtick in USD/JPY and EUR/JPY at the Asian open was small as a consequence. It is back to business. Although we cannot say that of Japan in the literal sense as this is Golden week holiday??¦
The EUR/GBP pair laid down a sideways path last Friday. Intraday a dip towards the 0.6820 zone was seen, but soon enough buyers-on-dips emerged, bringing the pair back to the 0.6830 zone. As there were no big market movers on the calendar in the EMU and UK last Friday, it was as rather uneventful session.
More for the same today then? There is indeed nothing on the calendar with only the UK GfK consumer confidence and a speech of ECB??™s Constancio. This is unlikely to be the feeding ground for a significant move on the day.
Some range trading between the 0.6850 and 0.6811 zone should be favoured on a day like this. A lot of European traders are also out of office making the bridge to the May 1 Labour Day holiday.
